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The Federal Reserve announces that it plans to raise interest rates next year, but it takes no immediate action. Today, how are GDP, interest rates, and the IS-LM curves affected?
The question states that the Federal Reserve plans to raise them but has not done so yet, therefore nothing is changed and the ISLM curves are unaffected.
How does an increase in national minimum wage affect the LM curve?
When income increases, money demand increases, resulting in the LM curve shifting to the right.
The FED buys back 500 billion bonds. How do interest rates change? How does the shift on the ISLM curve shift, affecting Y and R in what ways?
The Fed’s bond purchase increases the money supply, causing interest rates to fall. Lower interest rates increase investment and consumption, leading to higher aggregate demand.
Y rises. R lowers. The LM curve shifts to the right, while the IS curve doesn’t shift.
In a futuristic society where price levels and adjust instantly, and people’s life choices are controlled by robots who maintain a steady MPC, what happens to real GDP if the government issues stimulus checks proportional to people’s current wealth?
While nominal GDP rises, real GDP will stay the same as nothing in the market changes value-wise.
The U.S. government increases government spending by $400 billion without changing taxes. What happens to GDP, interest rates, and how do the ISLM curves shift?
Higher government spending increases aggregate demand, shifting the IS curve to the right. GDP rises and interest rates go up. The LM curve doesn’t shift.
A stock market crash causes households to lose wealth and cut back on spending. Meanwhile, rising uncertainty about the financial system causes banks to tighten lending standards, reducing the supply of loans. What happens to Y, R, and how do the ISLM curves shift.
The stock market crash, reduces spending as it says, which in turn reduces consumption and investment. These reductions lower GDP, causing the IS curve to shift to the left. Then, money demand lowers, shifting the LM curve further left. Thus, GDP falls, and we do not know whether interest rate rises or falls.
The Fed buys back $500 billion in bonds when the economy is already near full employment. What happens to the price level? How does the price levels’ effect on the ISLM curve effect Y and R in the short term and then afterward?
The Fed’s bond purchase increases the money supply, causing interest rates to fall and GDP to rise. Since the economy is near full employment, higher demand pushes the price level up. At first, the LM curve shifts to the right. Later, as there are higher prices, it reduces money supply, shifting LM slightly back left. The IS curve doesn’t shift.
Y is up and R is down in the short term, in the long term Y shifts back down some amount while R rises back some amount.
In a liquidity trap, scenario, the government decides to sell bonds. With this money, they build more public goods. How do both the IS and LM curves shift? What is the overall effect on GDP and interest rate?
Because this is a liquidity trap, the LM curve is flat at lower interest rates. Thus, monetary policies like the buying and selling of bonds do not have a big impact on the equilibrium between IS and LM. However, an increase in government spending would shift the IS curve to the right, resulting in an Increase in GDP and a negligible increase in Interest rates.
A major new technology raises productivity across the economy, increasing firms’ expected profitability and future income. Simultaneously, due to fears of future inflation, the Federal Reserve contracts the money supply.What happens to GDP, interest rates, and how do the IS and LM curves shift?
For the LM Curve, federal results contracts the money supply, therefore decreasing interest rates. For the IS curve, the new technology’s expected profitability, which boosts investment demand. Higher investment demand shifts the IS curve to the right. As we know IS curve shifting right leads to higher GDP.So far, the LM curve shifts left, IS curve shifts right,
Assume that there is no trade between other countries and the US or China. The US government enters a trade war with China, resulting in massive, equal tariffs from both sides. Given that the US imported significantly more goods from China than it exported before the trade war, does the US win or lose in this situation? In the short term, in which direction do the American GDP and Interest rate move in comparison to the Chinese interest rate and GDP?
US exports and imports both fall, however, because the US imports significantly more than it exports, if both fall by similar percentages, US net exports (exports - imports) will rise faster than Chinese net exports. However, looking at the bigger picture, trade wars hit exports much harder than imports because because the countries involved lose competitiveness in markets abroad. This combined with an additional decrease in investment due to uncertainty from the trade war cause GDP to fall, resulting in a left shift of the IS curve. However, when we compare this to a Chinese ISLM curve, the US would win the trade war as Chinese exports fall faster than American exports.
In summary, US GDP and interest rates fall slightly, while Chinese GDP and interest rates fall a lot more.